Reporting and Interpreting Sales
Revenue, Receivables, and Cash
Chapter 6
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Measuring and Reporting Receivables
When companies allow customers to purchase
merchandise on an open account, the customer
promises to pay the company in the future for the
purchase.
Accounts Receivable
Trade receivables are
amounts owed to the
business for credit sales of
goods, or services.
Nontrade receivables are
amounts owed to the
business for other than
business transactions.
Accounting for Bad Debts
Bad debts result from credit customers who will not pay the
business the amount they owe, regardless of collection efforts.
Bad Debt Expense
Matching Principle
Record in same accounting
period.
Sales Revenue
Most businesses record an estimate of the bad debt expense
with an adjusting entry at the end of the accounting period.
Recording Bad Debt Expense
Estimates
Deckers estimated bad debt expense
for 2006 to be $4,685,000.
Prepare the adjusting entry.
Bad Debt Expense is normally classified as a selling expense and is
closed at year-end.
GENERAL JOURNAL
Date
Description
Dec. 31 Bad Debt Expense (+E, -SE)
Allowance for Doubtful Accounts (+XA)
Contra asset account
Debit
Credit
4,685,000
4,685,000
Allowance for Doubtful Accounts
Balance Sheet Disclosure
Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value of accounts receivable
Amount the business
expects to collect.
Writing Off Uncollectible Accounts
When it is clear that a specific customer’s
account receivable will be uncollectible, the
amount should be removed from the Accounts
Receivable account and charged to the
Allowance for Doubtful Accounts.
Deckers’ total write-offs for 2006 were $6,969,000.
Prepare a summary journal entry for these write-offs.
GENERAL JOURNAL
Date
Description
Allowance for Doubtful Accounts (-XA)
Accounts Receivable (-A)
Debit
Credit
6,969,000
6,969,000
Writing Off Uncollectible Accounts
Assume that before the write-off, Deckers’ Accounts Receivable
balance was $62,640,000 and the Allowance for Doubtful Accounts
balance was $13,069,000. Let’s see what effect the total write-offs
of $6,969,000 had on these accounts.
Before WriteOff
Accounts receivable
$ 62,640,000
Less: Allow. for doubtful accts.
13,069,000
Net realizable value
$ 49,571,000
After WriteOff
$ 55,671,000
6,100,000
$ 49,571,000
The total write-offs of $6,969,000 did not change the net realizable
value nor did it affect any income statement accounts.
Estimating Bad Debts ─ Percentage of
Credit Sales
Bad debt percentage is based on actual
uncollectible accounts from prior years’
credit sales.
Focus is on determining the amount to record on the
income statement as
Bad Debt Expense.
Net credit sales
 % Bad debt loss rate
Amount of journal entry
Percentage of Credit Sales
In 2008, Kid’s Clothes had credit sales of $600,000. Past experience
indicates that bad debts are one percent of sales. What is the
estimate of bad debts expense for 2008?
$600,000 × .01 = $6,000
Now, prepare the adjusting entry.
GENERAL JOURNAL
Date
Description
Dec. 31 Bad Debt Expense (+E, -SE)
Allowance for Doubtful Accounts (+XA)
Debit Credit
6,000
6,000
Problems to work
• Exercises 6-8, 6-9
Estimating Bad Debts Aging of Accounts
Receivable
Focus is on determining the desired balance
in the Allowance for Doubtful Accounts on
the balance sheet.
Each customer’s account is aged by breaking
down the balance by showing the age (in
number of days) of each part of the balance.
An aging of accounts receivable for Kid’s Clothes
in 2008 might look like this . . .
Aging Schedule
Days Past Due
Customer
Aaron, R.
Baxter, T.
Clark, J.
Zak, R.
Total
% Uncollectible
Not Yet
Due
$ 1,200
1-30
$ 235
300
31-60
$
$ 3,500
0.01
$ 2,550
0.04
50
325
$ 1,830
0.10
Total
A/R
61-90 Over 90 Balance
$
235
1,500
$ 200 $ 500
750
$ 1,540
0.25
$ 1,240
0.40
325
$10,660
Based on past experience, the business estimates the percentage of
uncollectible accounts in each time category. These percentages are
then multiplied by the appropriate column totals.
Aging Schedule
Days Past Due
Customer
Aaron, R.
Baxter, T.
Clark, J.
Zak, R.
Total
% Uncollectible
Estimated
Uncoll. Amount
Not Yet
Due
$ 1,200
1-30
$ 235
300
31-60
$
50
$ 3,500
0.01
$ 2,550
0.04
325
$ 1,830
0.10
$
$
$
35
102
183
Total
A/R
61-90 Over 90 Balance
$
235
1,500
$ 200 $ 500
750
$ 1,540
0.25
$ 1,240
0.40
$
$
385
496
325
$10,660
$ 1,201
The column totals are then added to arrive at the
total estimate of uncollectible accounts of $1,201.
Record the Dec. 31, 2008, adjusting entry assuming that the Allowance for
Doubtful Accounts currently has a $50 credit balance.
Aging of Accounts Receivable
GENERAL JOURNAL
Date
Description
Dec. 31 Bad Debt Expense (+E, -SE)
Allowance for Doubtful Accounts (+XA)
Debit
Credit
1,151
1,151
1,201 Desired Balance After posting, the
Allowance
50 Credit Balance
account
would
$ 1,151 Adjusting Entry
look like this . . .
Aging of Accounts Receivable
Allowance for Doubtful Accounts
50
Notice that the balance after
adjustment is equal to the
estimate of $1,201 based on
the aging analysis performed
earlier.
1,151
1,201
Balance at
12/31/2008
before adj.
2008 adjustment
Balance at
12/31/2008
after adj.
Aging of Accounts Receivable
Accounts Receivable
 % Estimated Uncollectible
Desired Balance in Allowance Account
- Allowance Account Credit Balance
Amount of Journal Entry
Accounts Receivable
 % Estimated Uncollectible
Desired Balance in Allowance Account
+ Allowance Account Debit Balance
Amount of Journal Entry
Receivables Turnover
Receivables
=
Turnover
Net Sales
Average Net Trade Receivables
This ratio measures how many times average receivables are
recorded and collected for the year.
Deckers reported 2006 net sales of $304,423,000.
December 31, 2005, receivables were $39,683,000 and
December 31, 2006, receivables were $49,571,000.
Receivables
Turnover
$304,423,000
=
($39,683,000 + $49,571,000) ÷ 2
= 6.8
2006 Receivables Turnover Comparisons
Deckers
Skechers
Timberland
6.8
7.7
8.4
Problems to work
• Exercises 6-12, 6-14